New Rule Aims to Demystify Mortgage Origination Costs and Fees

Posted on August 21st, 2012

Yet another proposed rule is being floated by the Consumer Financial Protection Bureau (yes, they’ve been busy) to help mortgage shoppers better understand the origination costs and fees associated with their home loans.

The group argues that in its current state, it’s difficult for consumers to compare different combinations of mortgage rates, points and fees.

So in reality, consumers can still wind up with a bad deal, or a not-as-good deal, unknowingly, thanks to the complicated nature of mortgage lending.

Additionally, without this rule, the Dodd-Frank legislation would essentially prohibit the payment of upfront points and fees, even if a borrower wanted to pay them to snag a lower mortgage rate.

No-Point, No-Fee Mortgage Options Required

To clear things up a bit, the CFPB wants to make it a requirement for all loan originators to offer no-point and no-fee options alongside those where the borrower pays the fees.

They believe this will make it easier to comparison shop among different banks and lenders, because as it stands now, it’s really hard to get an apples-to-apples comparison.

Even if a consumer doesn’t shop around, the CFPB argues that they’ll be able to compare multiple loan offers from a single lender to better determine what rate and fee combination is best for them.

For example, a borrower could get the option of paying 1% of the loan amount for a 30-year fixed rate of 3.5%, or no origination fees at 3.625%.

The only time a lender wouldn’t have to offer these options is if doing so would lead to disqualification.

In other words, if a borrower’s mortgage rate jumped as a result of a no cost loan, making them ineligible for the loan to begin with.

My guess is that there will be a lot more no cost loans in the future, as most borrowers will prefer a loan where they pay nothing out-of-pocket, and only see their monthly mortgage payment rise by $20 or some other incidental amount.

Interest Rate Must Drop When Paying Upfront

In addition to that rule, the CFPB wants to ensure that paying mortgage discount points or loan origination fees at closing actually lowers a borrower’s interest rate.

So if a borrower pays one mortgage point, they should see their mortgage rate fall by a certain percentage, whether it’s a quarter of a point or just an eighth.

If the borrower’s mortgage rate doesn’t fall by some amount, upfront points or fees would essentially be disallowed.

After all, if a borrower is paying upfront costs for a lower interest rate on their loan, but doesn’t actually receive one, it’s arguably predatory.

All in all, it looks like there will be more transparency regarding interest rate buy downs and prepaid interest, which is a good thing if executed properly.

But there’s still some interpretation to the rule. A bank could charge a hefty loan origination fee and offer a disproportionate interest rate reduction.

More Qualified Loan Originators

Finally, the CFPB wants to beef up qualification and screening standards for the lovely people that originate our mortgages.

So no matter if an originator works for a bank, thrift, mortgage broker, or a nonprofit, they would be subject to the same character, fitness, and financial responsibility.

Additionally, they would be screened for felony convictions, and would all be required to undergo training to ensure they actually know what the heck they’re talking about.

Yes, there are scores of loan originators, mainly at the big corporate banks, who don’t know the first thing about mortgages. Instead, they rely on a computer to figure it all out for them, even if it’s not in your best interest!

Ideally, this will lead to more educated loan originators making better decisions for borrowers who need some guidance during the loan process.

The CFPB is seeking comment on these rules, and will finalize them by January 2013.

Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for 13 years.

One Comment

thetruthaboutthetruthAugust 21, 2012 at 2:20 pm -

It’s insane that federal regulators have to step in and make sure that shady loan practices aren’t taking advantage of citizens. You’d think that loans, mortgages, would’ve been cleaned up by now but we still have to wait for the Feds to pass this legislation in 2013. Of course, that’s the slow nature of our government practices. Nonetheless, this article terrifies from getting a mortgage from someone who is a ‘professional mortgage lender’ but still doesn’t know their game. Wait… or is the game ignorance to bedaffle an innocent customer?! Oh, reminds me of car sales people. Sad.